Paper or plastic? Retailers struggle with fees as customers increasingly use bank cards over cash

Monday

Sep 24, 2007 at 12:01 AMSep 24, 2007 at 2:43 PM

Retailers say they're the biggest tax you've never heard of: They're transaction fees that credit card companies and banks charge merchants every time a customer swipes a credit or debit card to pay for a purchase.

Steve Adams

Retailers say they're the biggest tax you've never heard of: They're transaction fees that credit card companies and banks charge merchants every time a customer swipes a credit or debit card to pay for a purchase.

As dozens of lawsuits challenging the fees grind through the courts and Congress holds off on any action, many mom-and-pop merchants are taking matters into their own hands. Violating the terms of their card agreements, many are requiring minimum purchases - typically $10 - for customers using plastic.

Rockland-based Tedeschi Food Shops has received at least two complaints in recent weeks about franchisees setting minimum purchases, executive vice president Robert Tedeschi Jr. said. The company has notified them that they are violating Tedeschi's policy.

Still, Tedeschi said he sympathizes with the plight of independent merchants, who lose money every time a customer pays for a small transaction with a card.

''We put a notice out to all franchisees that you can't do it,'' Tedeschi said. ''I hate to tell them that, because it's just killing them.''

Tedeschi Food Shops typically would make a profit of 2 cents on a $3 gallon of gas, but transaction fees gobble up 9 cents per gallon, causing shops to oftentimes lose money on gasoline sales, Tedeschi said.

As plastic threatens to overtake greenbacks as the predominant form of payment in stores, the stakes are high for merchants, banks and card companies.

A Morgan Stanley report indicated that average transaction fees rose from 1.6 percent of a purchase in 1998 to 1.75 percent in 2004. The report said the dollar volume of fee transactions grew from $9.4 billion to $17.5 billion during that period, through a combination of rising fees and more card transactions. The Merchants' Payment Coalition, a group of retailers organized to fight the fees, estimates interchange fees hit $30.7 billion in 2005.

Transaction fees consist of three elements. When a customer pays with a debit or credit card, the bank that issued the customer's card charges the store's bank a ''merchant discount fee'' and an ''interchange fee'' to cover the cost of issuing cards and collecting payments. The merchant's bank then imposes an additional fee, which is also charged to the merchant.

Credit cards have dozens of fee structures that incorporate factors such as the issuing bank's fees, whether the customer pays with a credit card, a debit card with signature or a debit card with PIN code, and how often the merchant reconciles transactions. Rewards cards typically have higher fees than others.

Regardless of the details, fees can wipe out profit margins and make minor card purchases a losing proposition for merchants.

''If somebody puts a pack of gum on the counter and pays with a credit card, you're better off if the person just stole it,'' said Jeff Lenard, spokesman for the Washington-based National Association of Convenience Stores. According to a survey of its members, convenience stores and gas stations made $4.8 billion in profits in 2006, a figure that was diminished by the $6.6 billion they paid in card fees.

''Essentially the credit card companies made more at the stores than the stores themselves,'' Lenard said.

The Electronic Payments Coalition, which lobbies on behalf of banks and credit card companies, disputes that fees are inflated and says government regulation would reduce choices for consumers. Executive Director Peter Madigan said the fees reflect investments by banks and credit card companies in technology, enabling millions of transactions to be processed in seconds. Fees are overhead costs for merchants, enabling them to attract business they otherwise wouldn't get, Madigan said.

''We think it does a lot for the merchant. It brings you in as a customer if you've got no money in your pocket,'' he said.

Critics say Visa and MasterCard enjoy a virtual ''duopoly'' over electronic payments, enabling them to jack up fees out of proportion to their administrative expenses. The House Judiciary Committee heard testimony in July that the fees violate antitrust laws, and Congress continues to study the issue.

''It's been a very tight relationship and they have had the ability to do whatever they want with transaction fees,'' said Pete Bartolik, spokesman for alternative transaction processor Tempo Payments of San Mateo, Calif. ''The more people use (debit and credit cards), the more prices go up.''

Madigan said there is ample competition within the industry, with more than 14,000 banks offering debit and credit cards.

Rosetta Jones, vice president of Visa USA, defended interchange fees.

''Visa will continue to protect consumers against some merchants who want to shift their cost of doing business onto consumers by charging a check out fee,'' Jones said in a prepared statement. ''This approach has already been tried - and according to reports failed - in Australia where check out fees have resulted in increased costs and fewer choices for cardholders.''

In the meantime, retailers such as CVS and Quincy-based Stop & Shop Supermarket Co. have launched debit cards under their own brands with alternative transaction processors that offer lower fees.

Stop & Shop in 2005 launched a ''PayVantage'' card that links directly to customers' checking accounts and also stores their loyalty card information. The transactions are processed by First Data Corp., a Colorado financial services company. After a test-launch at 12 Massachusetts stores, the card is now available at 30 stores.

On Sept. 10, Woonsocket, R.I.-based CVS began test-marketing a loyalty ''rewards payment'' card at 141 stores in the Indianapolis area. The cards link directly to customers' checking accounts, cutting Visa and Mastercard out of the loop. It also stores information on purchases typically saved on a CVS ExtraCare card, serving both as a loyalty card and a debit card.

The card is issued by Prospect Heights, Ill.-based HSBC Finance Corp., which is trying to set up loyalty debit card programs with other retailers.

Tempo Payments was founded in 2000 to offer merchants an alternate card processing system. The company charges retailers a flat 15-cent fee per transaction, said Bartolik, its spokesman.

Issued by individual retailers under their brand name, the cards are accepted at 200,000 retail locations nationwide including such chains as Best Buy, Circuit City, Marshalls, T.J. Maxx and Talbots. Customers' cards can be used not only at the retailer that issued the card, but any other retailer that accepts Tempo.

Boca Raton, Fla.-based National Payment Card has launched its own ''decoupled'' debit cards that link directly to customers' checking accounts and is targeting gas stations as retail partners. The company says it can reduce merchants' transaction fees by more than 80 percent.

Retailers, in turn, typically offer three-cent-per-gallon discounts on gasoline to encourage customers to sign up for the service.

In the 21 states that embed magnetic strips on the back of driver's licenses, customers can enter their license information on a Web site and swipe the license at stations as a form of payment.

NPC processes the transactions through the Automated Clearing House, a network commonly used for direct deposits and automatic withdrawals from bank accounts.

The company counts several hundred gas stations in southern states as customers, CEO Joe Randazza said. He predicts explosive growth because of merchants' concerns over fees.

''This is the second-largest expense to a gas merchant (after the cost of fuel),'' he said.

The Patriot Ledger

Steve Adams may be reached at sadams@ledger.com.

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